1. What is Foreign Foreign exchang exchange? e? When trade takes place between the residents of two countries, the two countries being a sovereign state state have their own set of regulation regulationss and currency. currency. Due to this problem arises in the conduct of international trade and settlement of the transactions .While the exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the currency of importer’s into that of the exporter’s country. country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks who deal in foreign exchange.
What is FOREX?
The Foreign xchange market, also referred to as the !F"#$! or !Forex! or !#etail forex! or !F$! or !%pot F$! or &ust !%pot! is the largest financial market in the world, with a volume of over '( trillion a day. )f you compare that to the '*+ billion a day volume that the ew -ork %tock xchange trades, you can easily see how enormous the Foreign xchange really is. )t actually euates to more than three times the total amount of the stocks and futures markets combined.
What is traded on the Foreign Exchange Market?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. /urrencies are traded through a broker a broker or or dealer, and are traded in pairs0 for example the euro and the 1% dollar 21#31%D4 or the 5ritish pound and the 6apanese -en 2758368-4. 5ecause you9re not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, say, 6apanese -en, -en, you are in effect buying a share in the 6apanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the 6apanese economy. :ccording to the 5ank for )nternational %ettlements, %ettlements, average daily turnover in global foreign exchange markets is estimated at ';.<= trillion. Trading in the world9s main financial markets accounted for ';.*> trillion of this. This approximately ';.*> trillion in main foreign exchange market turnover was broken down as follows? 1
'>.@@+ trillion in spot spot transactions transactions ';A* billion in outright forwards '>.B>( trillion in foreign exchange swaps '>*< billion estimated gaps in reporting
What is the purpose of trading in Foreign Exchange Market?
The foreign exchange market 2currency, forex, or F$4 trades currencies. )t lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. : foreign exchange market helps businesses convert one currency to another. For example, it permits a 1.%. business to import uropean goods and pay uros, even though the business9s income is in 1.%. dollars. )n a typical foreign exchange transaction a party purchases a uantity of one currency by paying a uantity of another currency. The modern foreign exchange market started forming during the >
Which currencies are traded? Symo! 1%D 1# 68758 /CF /:D :1D
"ountry 1nited %tates uro members 6apan 6ap an 7reat 5ritain %witerland /anada :ustralia
"urrency Dollar uro -en 8ound Franc Dollar Dollar
#ickname 5uck Fiber -en /able %wissy Eoonie :ussie
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
When can currencies e traded?
2
'>.@@+ trillion in spot spot transactions transactions ';A* billion in outright forwards '>.B>( trillion in foreign exchange swaps '>*< billion estimated gaps in reporting
What is the purpose of trading in Foreign Exchange Market?
The foreign exchange market 2currency, forex, or F$4 trades currencies. )t lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. : foreign exchange market helps businesses convert one currency to another. For example, it permits a 1.%. business to import uropean goods and pay uros, even though the business9s income is in 1.%. dollars. )n a typical foreign exchange transaction a party purchases a uantity of one currency by paying a uantity of another currency. The modern foreign exchange market started forming during the >
Which currencies are traded? Symo! 1%D 1# 68758 /CF /:D :1D
"ountry 1nited %tates uro members 6apan 6ap an 7reat 5ritain %witerland /anada :ustralia
"urrency Dollar uro -en 8ound Franc Dollar Dollar
#ickname 5uck Fiber -en /able %wissy Eoonie :ussie
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
When can currencies e traded?
2
The spot F$ market is uniue within the world markets. )t’s like a %uper WalGart where the market is open *(hours a day. :t any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
$he Forex market %O$"&
The Forex "T/ market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organiations. )n the "T/ market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart. The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of =AH of all transactions. The euro’s share is second at ;BH, while that of the yen is third at >A.+H.
Retai! foreign exchange rokers
There are two types of retail brokers offering the opportunity for speculative trading? retail foreign exchange brokers brokers an and market makers. makers. #etail traders 2individuals4 are a small fraction of this market and may only participate indirectly through brokers through brokers or or banks. #etail brokers, while largely controlled and regulated by the /FT/ and F: and F: might be sub&ect to forei foreign gn exchange scams. scams. :t present, the F: and /FT/ are imposing stricter reuirements, particularly in relation to the
$op 1' currency traders ( of o)era!! )o!ume* May +'', Rank
#ame
Market Share
>
Deutsche 5ank
*@.
*
15% :7
>(.+=H
;
5arclays /apital
>@.(+H
(
#oyal 5ank of %cotland
=.>
+
/iti
B.;*H
A
68Gorgan
+.(;H
B
C%5/
(.@
=
7oldman %achs
;.;+H
<
/redit %uisse
;.@+H
>@
58 8aribas
*.*AH
3
amount of et /apitaliation reuired of its members. :s a result many of the smaller, and perhaps uestionable brokers are now gone. )t is not widely understood that retail brokers and market makers typically trade against their clients and freuently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. : move toward DD 2o Dealing Desk4 and %T8 2%trai 2 %traight ght Throu Through gh 8rocessing44 has helped to resolve some of these concerns and restore trader confidence, but caution 8rocessing is still advised in ensuring that all is as it is presented. #on-ank Foreign Exchange "ompanies
onbank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. ).e., there is usually a physical delivery of currency to a bank account. %end Goney Come offer Come offer an in depth comparison into the services offered by all the ma&or nonbank foreign exchange companies. )t is estimated that in the 1I, >(H of currency transfers3payments are made via Foreign xchange /ompanies. These companies9 selling point is usually that they will offer better exchange rates or chea cheape perr
pay payment mentss
than than the cus custom tomer9s er9s bank bank..
Thes hese
com compani panies es dif differ from Goney oney
Transfer3#emittance Transfer3#emittance /ompanies in that they generally offer highervalue services.
Money $ransferRemittance "ompanies
Goney Gon ey tra transf nsfer er com compan panies ies3re 3remit mittan tance ce compani companies es perfor perform m highv highvolu olume me lowva lowvalue lue transf transfers ers generally by economic migrants back to their home country. )n *@@B, the :ite 7roup estimated 7roup estimated that there were ';A< billion of remittances 2an increase of =H on the previous year4. The four largest markets 2)ndia 2)ndia,, /hina /hina,, Gexico Gexico and and the 8hilippines 8hilippines44 receive '<+ billion. The largest and best known provider is Wester Western n 1nion with ;(+,@@@ agents globally.
Economic factors/
These include? 2a4 economic policy, policy, disseminated by government agencies and central banks, banks, 2b4 economic economic conditi conditions ons,, general generally ly reveal revealed ed throug through h econom economic ic report reports, s, and other other economic indicators.. indicators
4
conomic conomic policy comprises comprises government fiscal policy 2budget3sp 2budget3spending ending practices4 practices4 and monetary policy 2the means by which a government9s central bank influences the supply and !cost! of policy money, which is reflected by the level of interest rates4. rates4.
Economic conditions inc!ude/ 0o)ernment udget deficits or surp!uses
The market usually reacts negatively negatively to widening widening government budget government budget deficits deficits,, and positively to narrowing budget deficits. The impact is reflected in the value of a country9s currency. a!ance of trade !e)e!s and trends
The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country9s currency to conduct trade. %urpluses and deficits in trade of goods and services reflect reflect the competitiveness competitiveness of a nation9s nation9s economy. economy. For example, example, trade deficits may have a negative impact on a nation9s currency.
2nf!ation !e)e!s and trends
Typically a currency will lose value if there is a high level of inflation inflation in in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing erodes purchasing power , thus demand, for that particular currency. Cowever, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise shortterm interest rates to combat rising inflation.
Economic gro3th and hea!th
#eports such as 7D8, employment employment levels, levels, retail sales, sales, capacity utiliation and utiliation and others, detail the leve levels ls of a coun countr try9 y9ss econom economic ic growt growth h and health. 7enerally, the more healthy and robust a country9s economy, the better its currency will perform, and the more demand for it there will be.
4roducti)ity of an economy
5
)ncreasing productivity in an economy should positively influence the value of its currency. )ts effects are more prominent if the increase is in the traded sector
+. What is #ostro and 5ostro account? #ostro 6ccount
ostro is derived from the Eatin term !oursJ. )nternational accounting procedures between Eocal banks and overseas banks often involve the use of nostro and vostro accounts. : nostro 2means !ours! in Eatin4 account is an account maintained by a Eocal bank with a foreign bank that allows the Eocal bank to buy foreign currency. )n short a Knostro7 is our account of Kour7 money, held by you 5ostro 6ccount Lostro is derived from the Eatin term KyoursJ.
: vostro 2means !yours! in Eatin4 account is an account maintained by an overseas bank with a Eocal bank that allows the overseas bank to purchase Eocal currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the /ountry9s 2Eocal4 5ank and foreign banks. )n short a K)ostro7 is your account of Kyour7 money, held by us Examp!e/
When $ 25uyer4 a trader in 5ase /ountry wants to purchase '+@@@ worth of goods by paying cash. Gr. $ deposits the cash in his local bank in the country9s currency for the corresponding amount 2'+@@@4 then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a "%T#" account reuesting the bank to make the payment to - 2%eller4 in his local currency i.e. 1% Dollars. Thus facilitating the trade between $ M -. )F - wanted to buy 6
something from $ then the foreign bank would complete the deal using their L"%T#" account in $9s country.
8. Foreign Exchange 9eri)ati)es "ontracts Foreign exchange derivative contract means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets and includes? •
a transaction which involves at least one foreign currency other than currency of epal or 5hutan0 or
•
a transaction which involves at least one interest rate applicable to a foreign currency not being a currency of epal or 5hutan0 or
•
a forward contract, but does not include foreign exchange transaction for cash or Tom or %pot deliveries.
9Tom delivery! means delivery of foreign exchange on a working day next to the day of transaction. 9%pot delivery! means delivery of foreign exchange on the second working day after the day of transaction. The xchange /ontrol Department, #eserve 5ank of )ndia to regulate matters relating to Foreign xchange Derivative /ontracts under the new. Eegislation issued Foreign xchange Ganagement 2Foreign xchange Derivative /ontracts4 #egulations, *@@@> on ;rd Gay, *@@@. xcept to the extent permitted in the #egulations any person resident in )ndia or outside )ndia purposing to enter into a foreign exchange derivative contract would reuire prior permission of #eserve 5ank. The person’s resident in )ndia may enter into forward contracts with an authorised dealer for the transactions and sub&ect to the terms and. conditions mentioned in 8art : of %chedule )). 7
•
: person resident in )ndia may enter into a foreign exchange derivative contract other than forward contract for the transactions and sub&ect to the terms and conditions mentioned in 8art 5 of %chedule )). .
/ategories of persons resident outside )ndia mentioned in %chedule )) are permitted to enter into forward contracts with an authorised dealer in )ndia to hedge the transactions specified in that %chedule sub&ect to the terms and conditions mentioned therein. The applications for hedging of commodity price risks are reuired to be made to #eserve 5ank for prior approval through the )nternational Divisions of an authorised dealer. The procedure to be followed by the applicant and the authorised dealer and the documents to be furnished with the applications has been explained in %chedule ))). There is no change in the existing regulations relating to the forward contracts, other derivative products or hedging of commodity price risk .
4ermission of a person residing in 2ndia to enter in a deri)ati)e "ontract/
: person resident in )ndia may enter into a foreign exchange derivative contract in accordance with provision contained in %chedule ))) of the regulations to hedge an exposure to risk in respect of a transaction permissible under the FG: or rules or regulations or directions on orders made or issued there under. 4ermission to a person resident outside 2ndia to enter into a Foreign Exchange 9eri)ati)e "ontract
: person resident outside )ndia may enter into a foreign exchange derivative. /ontract with a person resident in )ndia in accordance with provisions contained in %chedule ))) of the regulations. Remittance re!ated to a foreign exchange 9eri)ati)e "ontract
:n authorised dealer in )ndia may remit outside )ndia foreign exchange in respect of a transaction undertaken in the following cases, namely option premium payable by a person resident in )ndia to a person resident outside )ndia0
•
•
remittance by a person resident in )ndia of amount incidental to a foreign exchange derivative contract entered into in accordance with regulation ( 0 8
remittance by a person resident outside )ndia of amount incidental to a foreign exchange
•
derivate contract entered into in accordance with regulation + 0
any other remittance related to a foreign exchange ,derivative contract approved by #eserve
•
5ank
:. What is FER6? The Foreign xchange Ganagement :ct, ><<<, 2FG:4 is an :ct to consolidate and amend the law relating to Foreign xchange, with the ob&ective of facilitating external trade and, payments and for promoting the orderly development and maintenance of the foreign exchange market in )ndia. (1) This :ct may be called the Foreign xchange #egulation :ct, >
2*4 )t extends to the whole of )ndia. 2;4 )t applies also to all citiens of )ndia outside )ndia and to branches and agencies outside )ndia of companies or bodies corporate, registered or incorporated in )ndia. 2(4
)t shall came into force on such date as the /entral 7overnment may, by notification in the "fficial 7aette, appoint in this behalf? 4ro)ided that different dates may be appointed for different provisions of this :ct and any
reference in any such provision to the commencement of this :ct shall be construed as a reference to the coming into force of that provision.
Why FER6? a4 F#: was introduced at a time when foreign exchange 2Forex4 reserves of the country were low, Forex being a scarce commodity.
9
b4 F#: therefore proceeded on the presumption that all foreign exchange earned by )ndian residents rightfully belonged to the 7overnment of )ndia and had to be collected and surrendered to the #eserve bank of )ndia 2#5)4. c4 )t regulated not only transactions in Forex, but also all financial transactions with nonresidents. F#: primarily prohibited all transactions, except to the extent permitted by general or specific permission by #5).
O;ecti)e of FER6 The main ob&ective of the F#: >
certain payments0
dealings in foreign exchange and securities0
transactions, indirectly affecting foreign exchange0
the import and export of currency, for the conservation of the foreign exchange resources of the country0
the proper utiliation of this foreign exchange so as to promote the economic development of the country
The basic purpose of F#: was? a4 To help #5) in maintaining exchange rate stability. b4 To conserve precious foreign exchange. c4 To prevent3regulate foreign business in )ndia
10
a& "ase Study for FER6 5io!ations on 2$" )T/ was started by 1Ibased tobacco ma&or 5:T 25ritish :merican Tobacco4. )t was called the 8eninsular Tobacco /ompany, for cigarette manufacturing, tobacco procurement and processing activities. )n ><>@, it set up a fullfledged sales organiation named the )mperial Tobacco /ompany of )ndia Eimited. To cope with the growing demand, 5:T set up another cigarette manufacturing unit in 5angalore in ><>*. To handle the raw material 2tobacco leaf4 reuirements, a new company called )ndian Eeaf Tobacco /ompany 2)ET/4 was incorporated in 6uly ><>*. 5y ><><, 5:T had transferred its holdings in 8eninsular and )ET/ to )mperial. Following this, )mperial replaced 8eninsular as 5:T9s main subsidiary in )ndia. 5y the late >. The company9s name was changed to )T/ Etd. in ><=>, )T/ diversified into the 11
cement business and bought a ;;H stake in )ndia /ements from )D5). This investment however did not generate the synergies that )T/ had hoped for and two years later the company divested its stake. )n ><=A, )T/ established )T/ Cotels, to which its three hotels were sold. )t also entered the financial services business by setting up its subsidiary, )T/ /lassic )n ><<(, )T/ commissioned consultants GcIinsey M /o. to study the businesses of the company and make suitable recommendations. GcIinsey advised )T/ to concentrate on its core strengths and withdraw from agribusiness where it was incurring losses. During the late ><<@s, )T/ decided to retain its interests in tobacco, hospitality and paper and either sold off or gave up the controlling stake in several noncore businesses. )T/ divested its +>H stake in )T/ :grotech to /on:gra of the 1%. Tribeni Tissues 2which manufactured newsprint, bond paper, carbon and thermal paper4 was merged with )T/. 5y *@@>, )T/ had emerged as the undisputed leader, with over B@H share in the )ndian cigarette market. )T/’ popular cigarette brands included 7old Flake, %cissors, Wills, )ndia Iings and /lassic
6!!egations/ : ma&ority of )T/’s legal troubles could be traced back to its association with the 1% based %uresh /hitalia and Devang /hitalia 2/hitalias4. The /hitalias were )T/’s trading partners in its international trading business and were also directors of )T/ )nternational, the international trading subsidiary of )T/. )n ><=<, )T/ started the N5ukhara’ chain of restaurants in the 1%, &ointly with its subsidiary )T/ )nternational and some on#esident )ndian 2#)4 doctors. Though the venture ran into huge losses, )T/ decided to make good the losses and honour its commitment of providing a *+H return on the investments to the #) doctors. )T/ sought /hitalias’ help for this. :ccording to the deal, the /hitalias later bought the 5ukhara venture in ><<@ for around '> million. )nvestors were paid off through the /hitalias ew6ersey based company, T% Fibers, which supplied waste paper to )T/ 5hadrachalam. To compensate the /hitalias, the )ndian Eeaf Tobacco Division 2)ETD4 of )T/ transferred '( million to a %wiss bank account, from where the money was transferred to Eokman stablishments, another /hitalia company in Eiechtenstein. Eokman stablishments made the payment to the /hitalias. This deal marked the beginning of a 12
series of events that eventually resulted in the company being charged for contravention of F#: regulations. During the ><=@s, )T/ had emerged as one of the largest exporters in )ndia and had received accolades from the government. This was a strategic move on )T/’s part to portray itself as a good corporate citien’ earning substantial foreign exchange for the country. )n the early ><<@s, )T/ started exporting rice to West :sia. When the 7ulf war began, )T/ was forced to withdraw rice exports to )ra, which resulted in large uantities of rice lying waste in the warehouses. )T/ tried to export this rice to %ri Eanka, which however turned out to be a damp suib because the rice was beginning to rot already. There were discussions in the /olombo parliament as to the uality of the rotting rice. This forced )T/ to import the rice back to )ndia, which was not allowed under F#:. There were a host of other such dubious transactions, especially in )T/’s various export deals in the :sian markets. The company, following the 5ukhara deal, had set up various front companies 2shell or bogus companies4 with the help of the /hitalias. %ome of the front companies were Cup Coon Traders 8vt. Etd., %T Fibers, %unny Trading, Fortune Tobacco Etd., /yprus, Laam )mpex M Warehousing, #% /ommodities, %unny %nack Foods and Eokman stablishment, the one involved in the 5ukhara deal. These front companies were for export transactions. )t was reported that )T/ artificially hiked its profits by overinvoicing imports and later transferring the excess funds as export proceeds into )ndia. :nalysts remarked that )T/ did all this to portray itself as the largest exporter in the country. )n ><<>, )T/ asked all its overseas buyers to route their orders through the /hitalias. The /hitalias overinvoiced the export orders, which meant they paid )T/ more than what they received from overseas buyers. For instance, in an export deal to %ri Eanka, )T/ claimed to have sold rice at ';+@ per ton O but according to D, the rice was actually sold for &ust '>B+ per ton. )T/ compensated the difference in amount to the /hitalias through various means including under invoicing other exports to them, direct payments to /hitalia companies and through )T/ 7lobal Coldings 8te Etd. 2)T/ 7lobal4, a %ingaporebased subsidiary of )T/. )T/ 7lobal was involved in a number ma&ority of the money laundering deals between )T/ and /hitalias. Cowever, by ><<+, )T/ 7lobal was on the verge of bankruptcy because of all its cash payments to the /hitalias. )t registered a loss of 1% ' >A.;( million for the financial year ><<+
aprofit of 1% '>.B million in ><<(<+. The loss was reportedly due to the attrition in trade margins, slow moving stock and bad debts in respect of which provisions had to be made. )t was also reported that )T/ 7lobal incurred a loss of '*@ million on rice purchased from the :gricultural 8roducts xport Development :uthority 2:8D:4, which was underwritten by the /hitalias. 5y the time this consignment was exported to % :rmagulam 5rothers in %ri Eanka through Laam )mpex, another )T/ front company, there was an acute fall in international rice prices. The consignee 2% :rmagulam 5rothers4 re&ected the consignment because of the delay in dispatch. Following this, )T/ bought back that rice and exported it to Dubai, which was against F#:. This resulted in huge outstanding debts to the /hitalias, following which they turned against )T/ and approached 5:T complaining of the debts and other financial irregularities at )T/ in late ><<+. 5:T, which was not on good terms with /hugh, reportedly took this as an opportunity to tarnish his reputation and compel him to resign. 5:T appointed a renowned audit firm Eovelock and Eewes to probe into the irregularities at )T/. Though the audit committee confirmed the charges of financial irregularities at )T/ during the early ><<@s and the role of the /hitalias in the trading losses and misappropriations at )T/ during the year ><<+
14
FER6 5io!ations The D found out that around ' =; million was transferred into )ndia as per )T/’s instructions on the basis of the accounts maintained by the /hitalia group of companies. :ccording to the D officials, the )T/ management gave daily instructions to manipulate the invoices related to exports in order to post artificial profits in its books. : sum of ' A.+ million was transferred from )T/ 7lobal to the /hitalias’ companies and the same was remitted to )T/ at a later date. :nother instance cited of money laundering by )T/ was regarding the overinvoicing of machinery imported by )T/ 5hadrachalam 8aperboards Etd., from )taly. The difference in amount was retained abroad and then passed to the /hitalias, which was eventually remitted to )T/. The D issued chargesheets to a few top executives of )T/ and raided on nearly (@ )T/ offices including the premises of its top executives in Iolkata, Delhi, Cyderabad, 7untur, /hennai and Gumbai. The chargesheets accused )T/ and its functionaries of F#: violations that included overinvoicing and providing cash to the /hitalias for acuiring and retaining funds abroad, for bringing funds into )ndia in a manner not conforming to the prescribed norms, for not realiing outstanding export proceeds and for acknowledging debt abroad T:5E ))
O)er)ie3 of FER6 5io!ations y 2$"
)ETD transferred '( million to a %wiss bank account. The amount was later transferred to Eokman stablishment, which in turn transferred the amount to a /hitalia company in the
1%. )T/ also made payments to nonresident shareholders in the case of certain settlements
without the permission of the #5). This was against %ections =2>4 and <2>42a4 of F #:0 )T/ underinvoiced exports to the tune of '>.;+ million, thereby violating the provisions of %ections >A2>42b4 and >=2*40 15
)T/ transferred funds in an unauthoried manner, to the tune of '@.+ million outside )ndia
by suppressing facts with regard to a tobacco deal. This was in contravention of %ection a 2>4
read with %ection (=0 )T/ acuired '@.* million through counter trade premium amounting to between ; and (
per cent on a total business of >.;@ billion, contravening %ection =2>40 The company had debts to the tune of *+ million due to overinvoicing in coffee and
cashew exports during ><<* <; to the /hitalias, contravening %ection <2>42c4 read with %ection
*A2A40 7. I. 8. #eddi, #. I. Iutty, Dr. . #avindranath and G. 5. #ao also violated the provisions
of %ections =2>4, <2>42a4, <2>42c4, >A2b4, >=2*4 and *A2A4 read with %ection A= of F#:.
Source/ 2"MR
The D also investigated the use of funds retained abroad for personal use by )T/ executives. Though the D had documentary proof to indicate illegal transfer of funds by top )T/ executives, nothing was reported in the media. The top executives were soon arrested. )n addition, the D uestioned many executives including :shutosh 7arg, former chief of )T/ 7lobal, % Ihattar, the then chief of )T/ 7lobal, the /hitalias, officials at 5:T and F) nominees on )T/ board. Geanwhile, the /hitalias and )T/ continued their court battles against each other in the 1% and %ingapore. )T/ stated that the /hitalias acted as traders for )T/’s commodities including rice, coffee, soyabeans and shrimp. )T/ accused the /hitalias of nonpayment for (; contracts executed in ><<(. )T/ sued the /hitalias seeking '>*.>< million in damages that included the unpaid amount for the executed contracts plus interest and other relief. Following this, the /hitalias filed a counterclaim for '++ million, accusing )T/ of commission defaults 2trading commission not paid4 and defamation. )n :ugust ><
)ndian /riminal 8rocedure :ct, following which the /hitalias were reported to have provided concrete proof of large scale overinvoicing by )T/ mainly in the export of rice, coffee and cashew nuts. )n another ma&or development, a few directors and senior executives of )T/ turned approvers in the F#: violation case against the company in ovember ><<<
KThe root cause for a case like )T/ to occur is the complexity of laws in our country and the continuing controls like F#:. We have to admit that the limits imposed on industry are not real and, therefore, every opportunity is sought to get around them. This leads to different interpretations of the law and so legal violations occurJ
$he 6ftermath < Setting $hings Right :larmed by the growing criticism of its corporate governance practices and the legal problems, )T/ took some drastic steps in its board meeting held on ovember >+, ><<<<<>><<( in connection with alleged F#: violations. The D also issued notices to the F)s and 5:T nominees on the )T/ board charging them with F#: contravention. )n %eptember ><
notices were related to the 5ukhara restaurant deal and the irregularities in )T/’s deals with )T/ 7lobal. )n late >< million, sought by the /hitalias from )T/ and ordered the /hitalias to pay back the ' >*.>< million claimed by )T/. The /hitalias contested the decision in a higher court, the ew 6ersey District court, which in 6uly ><<= endorsed the lower court’s order of awarding ' >*.>< million claim to )T/. )t also dismissed the claim for ' >( million made by the /hitalias against )T/. The &udgment was in favor of )T/ as the 1% courts felt that the /hitalias acted in bad faith in course of the legal proceedings, meddled with the factual evidence, abused information sources and concealed crucial documents from )T/. Following the court &udgment, the /hitalias filed for bankruptcy petitions before the 5ankruptcy /ourt in Florida, which was contested by )T/. )n early *@@>, the /hitalias proposed a settlement, which )T/ accepted. Following the agreement, the /hitalias agreed to the &udgement of the 5ankruptcy /ourt, which disallowed their 5ankruptcy 8etitions. :s a part of this settlement )T/ also withdrew its ob&ections to few of the claims of /hitalias, for exemption of their assets. Cowever, )T/’s efforts to recover its dues against the /hitalias continued even in early *@@*. The company and its directors inspected documents relating to the notices, with the permission of the D, to frame appropriate replies to the notices. )t was reported that )T/ extended complete cooperation to the D in its investigations. Cowever, the D issued yet another showcause notice 2the ** notice so far4 to )T/ in 6une *@@>, for violating section >A of F#:, in relation to )T/’s offer to pay ' *A million to settle )T/ 7lobal’s debts 2under section >A of F#:, a company should take prior permission from the #5), before it can forgo any amount payable to it in foreign exchange4. )T/ replied to the showcase notice in 6uly *@@>, stating it did not accept any legal liabilities while offering financial support to )T/ 7lobal. "n account of the provisions for appeals and counterappeals, these cases stood unresolved even in early *@@*. Cowever, )T/ had created a >.< million contingency fund for future liabilities. :lthough the company went through a tough phase during the late ><<@s, it succeeded in retaining its leadership position in its core businesses through value additions to products and services and through attaining international competitiveness in uality and cost standards. Despite various 19
hurdles, the company was a financial success, which analysts mainly attributed to the reformed corporate governance practices. What remains to be seen is whether the company would be able to come out unscathed from the various charges of unethical practices against it.
& "ontra)entions and 4ena!ties under FER6 "ne of the main reasons to fear F#: was, the unbridled power the enforcement authorities had, to arrest any person almost at their whim and fancy. 1nder %ec. ;+ of F#:, any officer authorised by the /entral government can arrest any person on mere suspicion of his having committed an offence under the :ct. This is one of the most obnoxious and most misused provisions of F#:. :ny offence under F#:, was a criminal offence, punishable with imprisonment as per code of criminal procedure, >
=. 4rogression$ransfer of FER6 to FEM6
20
F#: in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early ><<@s. While the need for sustained husbandry of foreign exchange was recognied, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign xchange Ganagement :ct, ><<< 2FG:4 came into being. The scheme of F#: provided for obtaining #eserve 5ank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by #eserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the :ct came into force from > st 6anuary >
FG: has brought about a sea change in this regard and except for section ;, which relates to dealing in foreign exchange, etc. no other provisions of FG: stipulate obtaining #5) permission. )t appears that this is a transition from the era of permissions to regulations. The emphasis of FG: is on #5) laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of Kexchange controlJ and brought in the era of Kexchange managementJ. )n view of this change, the title of the legislation has rightly been changed to FG:.
The preamble to FG: lays down that the :ct is to consolidate and amend the law relating to foreign exchange with the ob&ective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in )ndia. :s far as facilitating external trade is concerned, section + of the :ct removes restrictions on drawal of foreign exchange for the purpose of current account transactions. :s external trade i.e. import 3 export of goods M services involve transactions on current account, there will be no need for seeking #5) permissions in connection with remittances involving external trade. The need to remove restrictions on current account transactions was necessitated as the country had given notice to the )GF in :ugust, ><<( that it had attained :rticle L))) 21
status. This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions. %ection +, however, contains a proviso that the /entral 7overnment may, in public interest and in consultation with the #eserve 5ank, impose such reasonable restrictions for current account transactions as may be prescribed. )t appears that this is an enabling provision for the /entral 7overnment to impose restrictions on current account transactions in case the situation warrants such restrictions probably due to foreign exchange crisis in future. This proviso seems to have been added keeping in view the lessons learnt by certain %outhast :sian countries during the >< sections 2some were deleted in the ><<; amendment of the :ct4 of which ;* sections related to operational part and the rest covered penal provisions, authority and powers of nforcement Directorate, etc. FG: contains (< sections of which >* sections cover operational part and the rest contravention, penalties, ad&udication, appeals, enforcement directorate, etc. What was a full section under F#: seems to have been reduced to a subclause under FG: in some cases. For examp!e*
2i4
%ection >; of F#: provided for restrictions on import of foreign currency M foreign securities. ow this restriction is provided through a subclause A2;42g4.
2ii4
%ection *+ of F#: provided for restrictions on )ndian residents holding immovable properties outside )ndia. ow the restriction is under subclause A2(4. #eduction in the number of sections means nothing. #eal uality of liberaliation will be known when all notifications M circulars are finalied M published.
#eed for FEM6
The demand for new legislation was basically on two main counts. The F#: was introduced in >
best interest of the country. Lery strict restrictions have outlived their utility in the current changed scenario. %econdly there was a need to remove the draconian provisions of F#: and have a forwardlooking legislation covering foreign exchange matters.
Repea! of draconian pro)isions under FER6
The draconian regulations under F#: related to unbridled powers of nforcement Directorate. These powers enabled nforcement Directorate to arrest any person, search any premises, seie documents and start proceedings against any person for contravention of F#: or for preparations of contravention of F#:. The contravention under F#: was treated as criminal offence and the burden of proof was on the guilty.
Why there 3as a need to scrap FER6? a4 The Foreign xchange #egulation :ct was replaced by the Foreign xchange Ganagement :ct as it was an impediment in )ndia9s to go global.
b4 )ndia9s foreign exchange transactions were governed under the Foreign xchange #egulation 23
:ct until 6une *@@@. This law had been enacted in >
c4 Thus, there was a need to scrap F#: and the Foreign xchange Ganagement :ct, ><<< came into effect on 6une >, *@@@. Cowever some of the relevant progresses made, from F#: to FG:, are as follows? Withdra3a! of Foreign Exchange
ow, the restrictions on withdrawal of Foreign xchange for the purpose of current :ccount Transactions, has been removed. Cowever, the /entral 7overnment may, in public interest in consultation with the #eserve 5ank impose such reasonable restrictions for current account transactions as may be prescribed. FG: has also by and large removed the restrictions on transactions in foreign xchange on account of trade in goods, services except for retaining certain enabling provisions for the /entral 7overnment to impose reasonable restriction in public interest.
>. What is FEM6? The Foreign xchange #egulation :ct of >st 6une, *@@@. )t was replaced by the Foreign Exchange Management 6ct 2FG:4, which was passed in the winter session of 8arliament in ><<<. nacted in >
Directorate 2.D.4. :ny offense under F#: was a criminal offense liable to imprisonment, whereas FG: seeks to make offenses relating to foreign exchange civil offenses. FG:, which has replaced F#:, had become the need of the hour since F#: had become incompatible with the proliberaliation policies of the 7overnment of )ndia. FG: has brought a new management regime of Foreign xchange consistent with the emerging frame work of the World Trade "rganiation 2WT"4. )t is another matter that enactment of FG: also brought with it 8revention of Goney Eaundering :ct, *@@* which came into effect recently from >st 6uly, *@@+ and the heat of which is yet to be felt as Knforcement DirectorateJ would be investigating the cases under 8GE: too.
1nlike other laws where everything is permitted unless specifically prohibited, under F#: nothing was permitted unless specifically permitted. Cence the tenor and tone of the :ct was very drastic. )t provided for imprisonment of even a very minor offence. 1nder F#:, a person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty.
a& O;ecti)es and Extent of FEM6 The ob&ective of the :ct is to consolidate and amend the law relating to foreign exchange with the ob&ective of facilitating external trade and pa yments and for promoting the orderly development and maintenance of foreign exchange market in )ndia. FG: extends to the whole of )ndia. )t applies to all branches, offices and agencies outside )ndia owned or controlled by a person who is a resident of )ndia and also to any contravention there under committed outside )ndia by any person to whom this :ct applies. xcept with the general or special permission of the #eserve 5ank of )ndia, no person can ? •
deal in or transfer any foreign exchange or foreign security to any person not being an authoried person0
•
make any payment to or for the credit of any person resident outside )ndia in any manner0
•
receive otherwise through an authoried person, any payment by order or on behalf of any person resident outside )ndia in any manner0
•
reasonable restrictions for current account transactions as may be prescribed. 25
:ny person may sell or draw foreign exchange to or from an authoried person for a capital account transaction. The #eserve 5ank may, in consultation with the /entral 7overnment, specify ? •
any class or classes of capital account transactions which are permissible0
•
the limit up to which foreign exchange shall be admissible for such transactions
Cowever, the #eserve 5ank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortiation of loans or for depreciation of direct investments in the ordinary course of business. The #eserve 5ank can, by regulations, prohibit, restrict or regulate the following ? •
Transfer or issue of any foreign security by a person resident in )ndia0
•
Transfer or issue of any security by a person resident outside )ndia0
•
Transfer or issue of any security or foreign security by any branch, office or agency in )ndia of a person resident outside )ndia0
•
:ny borrowing or lending in foreign exchange in whatever form or by whatever name called0
•
:ny borrowing or tending in rupees in whatever form or by whatever name called between a person resident in )ndia and a person resident outside )ndia0
•
Deposits between persons resident in )ndia and persons resident outside )ndia0
•
xport, import or holding of currency or currency notes0
•
Transfer of immovable property outside )ndia, other than a lease not exceed ing five years, by a person resident in )ndia0
•
:cuisition or transfer of immovable property in )ndia, other than a lease not exceeding five years, by a person resident outside )ndia0
•
7iving of a guarantee or surety in respect of any debt, obligation or other liability incurred
2i4 by a person resident in )ndia and owed to a person resident outside )ndia or 2ii4 by a person resident outside )ndia. : person, resident in )ndia may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside )ndia if such currency, security or property was 26
acuired, held or owned by such person when he was resident outside )ndia or inherited from a person who was resident outside )ndia. : person resident outside )ndia may hold, own, transfer or invest in )ndian currency, security or any immovable property situated in )ndia if such currency, security or property was acuired, held or owned by such person when he was resident in )ndia or inherited from a person who was resident in )ndia. The #eserve 5ank may, by regulation, prohibit, restrict, or regulate establishment in )ndia of a branch, office or other place of business by a person resident outside )ndia, for carrying on any activity relating to such branch, office or other place of business. very exporter of goods and services must ? •
Furnish to the #eserve 5ank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside )ndia0
•
Furnish to the #eserve 5ank such other information as may be reuired by the #eserve 5ank for the purpose of ensuring the realiation of the export proceeds by such exporter. The #eserve 5ank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the #eserve 5ank determines, having regard to the prevailing marketconditions, is received without any delay, direct any exporter to comply with such reuirements as it deems fit. Where any amount of foreign exchange is due or has accrued to any person resident in )ndia, such person shall take all reasonable steps to realie and repatriate to )ndia such foreign exchange within such period and in such manner as may be specified by the #eserve 5ank.
FEM6 Ru!es 4o!icies The Foreign xchange Ganagement :ct, ><<< 2FG:4 came into force with effect from 6une >, *@@@. With the introduction of the new :ct in place of F#:, certain structural changes were brought in. The :ct consolidates and amends the law relating to foreign exchange to facilitate 27
external trade and payments, and to promote the orderly development and maintenance of foreign exchange in )ndia. From the #R2 perspecti)e , FG: broadly covers all matters related to foreign exchange, investment avenues for #)s such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in )ndia. FG: vests with the #eserve 5ank of )ndia, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above. Section + - The :ct here provides clarity on several definitions and terms used in the context of
foreign exchange. %tarting with the identification of the onresident )ndian and 8ersons of )ndian origin, it defines !foreign exchange! and !foreign security! in sections *2n4 and *2o4 respectively of the :ct. )t describes at length the foreign exchange facilities and where one can buy foreign exchange in )ndia. FG: defines an authorised dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility Section 8 prohibits dealings in foreign exchange except through an authorised person. %imilarly,
without the prior approval of the #5), no person can make any payment to any person resident outside )ndia in any manner other than that prescribed by it. The :ct restricts nonauthorised persons from entering into any financial transaction in )ndia as consideration for or in association with acuisition or creation or transfer of a right to acuire an y asset outside )ndia. Section : restrains any person resident in )ndia from acuiring, holding, owning, possessing or
transferring any foreign exchange, foreign security or any immovable property situated outside )ndia except as specifically provided in the :ct. Section > deals with capital account transactions. This section allows a person to draw or sell
foreign exchange from or to an authorised person for a capital account transaction. #5) in consultation with the /entral 7overnment has issued various regulations on capital account transactions in terms of subsect ion 2*4 and 2;4 of section A. Section @ covers the export of goods and services. :ll exporters are reuired to furnish to the #5)
or any other authority, a declaration regarding full export value. 28
Section A puts the responsibility of repatriation on the persons resident in )ndia who have any
amount of foreign exchange due or accrued in their favour to get the same realised and repatriated to )ndia within the specific period and in the manner specified by the #5). The duties and liabilities of the :uthorised Dealers have been dealt with in Sections 1'* 11 and 1+ , while Sections 18 to 1= cover penalties and enforcement of the orders of the :d&udicating :uthority as well as the power to compound contraventions under the :ct.
& 4re)ention of Money !aundering 6ct 2ntroduction/-
Goney laundering involves disguising financial assets so that they can be used without detection of the illegal activity that let to its production. Through the process of Kmoney launderingJ a person converts illegal money into a legal entity. Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and pro&ecting it as untainted property shall be held guilty of the offence of money laundering. The %chedule to the 8revention of Goney Eaundering :ct 2henceforth, 8GE:4, *@@*, lists some of the offences under the following Eegislations? "ffences under the )ndia 8enal /ode 2part :4 eg. Waging or attempting to wage war, or abetting waging of war against the 7overnment of )ndia, /onspiring to commit offences punishable by s.>*> against the state >. "ffences under the #arcotic 9rugs and 4sychotropic Sustances :ct, ><=+ eg. /ontravention in relation to opium poppy and opium. *. "ffences under )ndia 4ena! "ode 2part 54 eg. Gurder, kidnapping for ransom, counterfeiting currency notes or bank notes. ;. "ffences under the 6rms 6ct, ><+< eg. Inowingly purchasing arms from unlicensed person not entitled to purchase the same. (. "ffences under the Wi!d!ife %4rotection& 6ct , ><+A eg. %educing or soliciting for purpose of prostitution. 29
A. "ffences under the 4re)ention of "orruption 6ct , ><== eg. Taking gratification for exercise of personal influence, with public servant The innumerate under therefore stated :cts generate huge sums. The launderer converts these sums into untainted money by investing them into shares or banks and thereby converts the essential character of the money. 0enesis/-
The 1 7eneral :ssembly, in its %pecial %ession 2><<<4, came up with a political declaration that reuired the Gember%tates to adopt money laundering legislation and programme. Goreover with the changed economic scenario and the dynamic process of liberaliation laws like Foreign xchange Ganagement 5ill in place of earlier F#: was felt to be much static and harsh. :s is said in Eatin %ummum 6us %uma )n&uria 2too much legislation, too much of regulations create problems for a man4 hence it was felt that a new law was reuired to curtail the powers of launderers. :ccordingly on the #ecommendations of the %tanding /ommittee on Finance on (th Garch, ><<< the 5ill was presented in the Eok %abha and the :ct was incorporated and enacted on >Bth 6anuary, *@@;.
Significance/-
The 8GE: was a very peculiar legislation. The /ivil 8rocedure /ode, ><@= and the /riminal 8rocedure /ode, >
With the 8GE: coming into force, banks, financial institutions and financial intermediaries will have to mandatorily report to 7overnment all suspicious transactions and those over #s.>@ Eakh. :s per the provisions of the :ct, every banking company, financial institution and intermediary needs to maintain a record of all transactions, the nature and value of which is being prescribed in the rules. Financial institutions, including chit funds, cooperative banks and intermediaries like stock brokers, share transfer agents, underwriters and investment advisers were to be registered 30
with %5). The Financial )ntelligence 1nit 2F)1)D4 was set up as a multidisciplinary unit for establishing links between suspicious or unusual financial transactions and criminal activities. Begis!ations in consonance 3ith 4MB6/-
>. 5anking #egulation :ct, ><(<. *. /hit Funds :ct, ><=*. ;. Deposit )nsurance and /redit 7uarantee /orporation :ct, > (. :5:#D :ct, ><=>. +. ational Cousing 5ank :ct, ><=B. A. #eserve 5ank of )ndia :ct,><;(. B. %ecurities and xchange 5oard of )ndia act,><<*. 2nternationa! support system/-
)t stands highly imperative to exchange information at an international level in order to make the enforcement of a law efficient. F)1s therefore have the ability to exc hange financial information that stands helpful to follow the financial trail in respect to investigation and enforcement of law in activities related to terrorism and uncovering financial assets. a4 F6$F/ - The Financial :ction Task Force 2F:TF4 is an intergovernmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing.
The
Force
has
provided
forty
#ecommendations
and
ine
%pecial
#ecommendations that provide a complete set of counter measures against money laundering. These #ecommendations have been recognied, endorsed and adopted by many international bodies as the international standards for combating Goney Eaundering. b4 Egmont 0roup/ - The gmont 7roup serves as an international network fostering improved communication and interaction among F)1s. gmont 7roup is named after the venue in 5russels where the first such meeting of F)1 was held in 6une, ><<+. The goal of the 7roup is to provide a platform for F)1s around the world to improve support to their respective governments in the fight against money laundering terrorist financing and other financial crimes.
31
c4 6sia4acific 0roup/ - The :sia38acific 7roup on money laundering 2:874 was officially established as an autonomous regional antimoney laundering body in February, ><
)n the recent years there has been a sudden upsurge in organied crimes and terrorist activities. Eike any other activity even these antisocial activities need financial support. This financial support is provided through illegal money which is laundered in economy of a country. Goney laundering has recently gained urgency of attention due to its links with terrorist activities. #5), %5) and )#D: are under the purview of 8GE:. )t allows search and seiure of suspected properties by officials and stipulates punishment of minimum three years’ imprisonment for the 7uilty. Goney laundering can be checked by monitoring illegal forex transactions, real estate, gems and &ewellery and high value purchases. )n )ndia, however, 8GE: regulates only banking companies, financial institutions and intermediaries to maintain records, furnish information and verify identity of the customers. )t does not deal with tapping of information within the ambit of informal economy as in case of forex transactions, because lot of dealing in this avenue is done through informal channels. The 8GE: makes it illegal to enter into a transaction related to funds derived from criminal activities as also to possess or transfer such funds. Financial institutions and intermediaries registered with %5) are reuired to furnish to the incometax authorities, details of all transactions also need to be furnished. Cowever, this task of furnishing information and maintaining records is indeed a titanic one. )nfrasoft Technologies Etd. has launched "G) nterprise, antimoney laundering software that offers reporting and uery capabilities. This software is widely used by banks in 1I.
32
)n *@@@, black money was estimated to account for more than (@H of )ndian’s 7D8 2approximately '>+@ billion4. The )GF estimates the global volume of money laundering to be somewhere between 'A@@ billion to '>.= trillion a year. With such statistics, in )ndia, there are absolutely no estimates regarding spending on anti money laundering measures by banks and financial institutions. Whereas, in 1%:, the collective spending by banking, insurance and fund management companies on anti money laundering measures is estimates to be ' >@.< billion between *@@; and *@@+. With 8GE: in force it is very crucial for the 5anks to find :GE software to check, identify and report suspicious transactions regularly. Failure to comply with this demand would result in losing business and fighting legal battles. Despite of all the afore stated problems, )nfrasoft "G) :GE software has found no takers. The ma&or part of the blame for not making use of the software is , however, shelved on the shoulders of strict and static #5) #ules. )t should be realied that 8GE: is not a onetime legislation. The :ct was amended to resolve the technicalities. )ndia has only made amendments in respect to >> out of *@ categories prescribed by F:TF. This clearly means that amendments are reuired to be made in other categories as well particularly enclosing within its scope terrorism financing, smuggling, piracy etc. to cope with the )nternational %tandards. Without which the )ndia banks would get paralyed in developed nations. :part from the banking and other financial institutions and intermediaries the :ct also extends upon the working of )nternational 8ayment gateways such as Lisa and Gaster card along with money transfer providers. Cowever, it is strongly felt that 8GE: should incorporate within its ambit the casinos, because a huge amount of money, in form of informal transactions, is being operated upon through such places. "onc!usion/-
The menace of money laundering is highly diabolical in nature. )t hits not only at the root of a country’s financial structure but also kills its social structure by financing antisocial activities. )t is as a matter of great grief that despite of having innumerable enactments and legislation, )ndia is still under the vigilance of the )nterpol because of her relaxed attitude towards the threat posed by 33
money laundering. Cence, it is extremely important to catch hold of the growing threat of money laundering by legislating and implementing amendments in the present law of :nti money Eaundering. MaharashtraCs first arrest under money !aundering act/
For the first time, a person has been arrested under the stringent 8revention of Goney Eaundering :ct after it was enacted on 6uly >, *@@+. :shok # /huggani allegedly duped &ewelers, diamond merchants and laundered money outside the country. The enforcement directorate 2D4 arrested /huggani, a +@yearold Dutch national of )ndian origin, on Wednesday. )ncidentally, this is also the first arrest made by the D in almost a decade. arlier, it was regulated by the Foreign xchange Gaintenance :ct 2FG:4 which did not allow the D to arrest an individual. /huggani was produced before the metropolitan magistrate9s court and has been remanded in &udicial custody for >( days. Ce had allegedly duped diamond merchants and &ewelers in *@@B, an D official said. Following this, two cheating cases involving amounts of #s++ lakhs and #s+B lakhs were registered with the economic offences wing 2"W4 of the Gumbai crime branch and the D5 Garg police station. :fter the charge sheets were filed, the D took over the investigations in the money laundering case.!Despite several summons, the suspect did not came to the D. Ce was never available in the past year,! the official said. !/huggani is a permanent resident of Colland and was staying in )ndia since *@@* on a residential permit visa,!
"ase Study under 4re)ention of Money Baundering 6ct Ex-Dharkhand "M Madhu oda ooked under 4MB6
: case was registered against former 6harkhand chief minister Gadhu Ioda and three of his erstwhile cabinet colleagues Iamlesh %ingh, 5hanu 8ratap %hahi and 5handu Tirkey by the nforcement Directorate on Friday < "ctober *@@< for alleged money laundering and diversion of
state funds besides making huge investments abroad without legal sanction. The ;=yearold Ioda, who may face arrest also, is the first chief minister and highprofile politician to have been booked under the 8revention of Goney Eaundering :ct.The D filed an 34
nforcement /ase )nformation #eport 2euivalent to a F)#4 before the 8revention of Goney Eaundering :ct court in #anchi against Ioda, Iamlesh %ingh, 5hanu 8ratap %hahi and 5handu Tirkey besides five others. The ministers including Ioda, who was the chief minister of 6harkhand between February *@@+ and :ugust *@@=, have been accused of amassing properties worth hundreds of crores abroad, in countries such as the 1:, Thailand, )ndonesia, %ingapore and Eiberia, besides several places in )ndia. Puoting from the /)#2 European Conference on Information Retrieval), sources said Ioda, who was the first independent candidate to become a chief minister, has been named for purchase of mines in Eiberia worth 1%D >B lakhs 2#s =.+ crores4. Gost of the assets by Ioda, ironically the first chief minister to be boo ked under 8GE:, were purchased in the name of a close confidant 5inod %inha, once a tractor mechanic. :s per the /)#, the properties in the name of %inha run into several hundred crores of rupees. :s per the declaration given by the three ministers individually, nobody had bank deposits more than #s >.< lakhs or immovable property worth over #s >.>+ lakhs. %ources said the agency is looking into details of real wealth of the accused ministers and it will also attach all the properties identified. They said under the 8GE:, the onus of proof is on the accused rather than the agency. Two other cabinet colleagues of Ioda have already been booked by the D for alleged money laundering, foreign exchange violations and forgery. The Directorate had swung into action after 6harkhand vigilance department lodged a complaint and recently searched the homes of Cari arayan #ai and nos kka, both cabinet ministers in the Ioda government besides that of Ioda. D officials claimed they had come across documents suggesting that the former ministers had amassed huge wealth including mines, real estate firms and properties in Cong Iong, Thailand and some other countries. : case was lodged against the two former ministers by the vigilance department on the directive of a vigilance court under various )8/ sections last year. fforts to get in touch with Ioda did not fructify as his mobile phone was switched off and no one answered the phone calls at his residence. The vigilance court had then directed the department to file the charges when it heard a petition by Linod Iumar, a resident of 6harkhand9s Deoghar district. 5oth #ai and kka were arrested following the /ourt9s directive recently after which the D came into the picture.
35
c& Regu!atory 4ro)isions 3ith Respect to "urrent 6ccount "apita! 6ccount/
"urrent 6ccount $ransactions /urrent :ccount Transactions as defined in %ection * 2&4 of FG:, means a transaction other than a capital account transaction and without pre&udice to the generality of the other provisions shall include?
•
• • •
payments due in connection with foreign trade, other account current business, services and short term banking and credit facilities in tire ordinary course of business0 payments due as interest on loans and as net income from the investments0 remittances for living expenses of parents, spouse and children residing abroad0 expenses in connection with foreign travel, education and medical care of parents, spouse and children.
8rovisions to %ection + of FG: empowers the /entral 7overnment in public interest and in consultation with the #eserve 5ank to impose such reasonable restrictions for current account transactions in exercise of the powers conferred and in consultation with the #eserve 5ank the /entral 7overnment issued Foreign xchange Ganagement 2/urrent :ccount Transactions4 #ules *@@@ on ;rd Gay, *@@@ in this regard. )n terms of provisions of %ection + of FG:, any person may sell or draw foreign exchange to or from an authorised dealer if such sale or withdrawal is a current account transaction.
The proviso to %ection + empowers 7overnment of )ndia, in public interest and in consultation with the #eserve 5ank to impose reasonable restrictions on certain current account transactions. )n terms of the rules ;, drawal of exchange for the following transactions is prohibited. •
Travel to epal or 5hutan
•
Transactions with a person resident in epal or 5hutan 2unless specifically exempted by #eserve 5ank by general or special order4.
•
#emittance out of lottery winnings 36
•
#emittance of income from racing3riding etc. or any other hobby.
•
#emittance for purchase of lottery tickets, banned3proscribed magaines, football pools, sweepstakes, etc.
•
8ayment
of commission
on exports
made
towards
euity investment in
6oint
Lentures3Wholly "wned %ubsidiaries abroad of )ndian companies. •
#emittance of dividend by any company to which the reuirement of dividend balancing is applicable.
•
8ayment of commission on exports under #upee %tate /redit #oute. 8ayment related to !/all 5ack %ervices! of telephones.
•
#emittance of interest income on funds held in on#esident %pecial #upee 2#%#4 :ccount scheme.
4rohiition on dra3a! of foreign exchange.
#ule ; of Foreign xchange Ganagement 2/urrent :ccount Transactions4 #ules, *@@@ provides that the drawal of foreign exchange by a person is prohibited for the following purposes, namely? •
transactions specified in %chedule ))) of the notification0
•
travel to epal and3or 5hutan0
•
a transactions to the person resident in epal3or 5hutan.
The prohibition on the transaction with a person resident in epal or 5hutan may be exempted by the #eserve 5ank of lndia sub&ect to such terms and conditions as it may considered necessary to stipulate by general or special order. The transactions which are specified in %chedule8 and thereby absolutely prohibited are? •
remittance out of lottery winnings0
•
remittance of income from racing3riding etc. or any other hobby0
•
remittance for purchase of lottery tickets, banned3prescribed magaines, football pools, sweepstakes ete. 0
•
payment of commission on exports made towards euity investment in &oint ventures3wholly owned subsidiaries abroad of )ndian companies0
•
remittance of dividend by any company to which the reuirement of dividend 37
balancing is applicable0 •
payment of commission on exports under #upee %tate /redit #oute0 . payment related to !/all 5ack %ervices! of telephone0
•
remittance of interest income on funds held in on#esident %pecial #upee %cheme :ccount0
4rior appro)a! of the 0o)ernment of 2ndia .
8rovides that no person shall draw foreign exchange for the transaction included in .Table: without prior approval of the 7overnment of )ndia. The provisions to this rule states that this rule shall not apply where the payment is made out of funds held in #esident Foreign /urrency 2#F/4 :ccount or xchange arners Foreign /urrency 2F/4 :ccount of the remitter. T:5E: 4urpose of Remittance
Whose appro)a! is reuired
Cultural Tours
Ministry of Human Resources Developments (Department of Education and Culture) Ministry of Finance, (Department of Economic Affairs) Advertisement abroad by any !"#!tate And Ministry of Finance, (Department of Economic Central $overnment Department Affairs)% Remittance of frei&'t of vessel c'arted by a !" Ministry of !urface Transport (C'arterin& in&) ayment of import by a $overnment Department Ministry of !urface Transport (C'arterin& in&) or a !" on C.I.F basis (i.e. ot'er t'an F.O.B and F.A.S basis) Multimodal transport operators ma*in& remittance Re&istration Certificate from t'e Director to t'eir a&ents abroad $eneral of !'ippin&% Remittance of 'irin& c'ar&es of transponders Ministry of Finance, (Department of Economic Affairs) Remittance of container detention c'ar&es Ministry of !urface Transport (Director $eneral e+ceedin& t'e rate prescribed by Director $eneral of !'ippin&) of !'ippin& Remittances under tec'nical collaboration Ministry of 2ndustry and Commerce% a&reements 'ere payment of royalty e+ceeds -.on local sales and /. on e+ports and lumpsum payment e+ceeds "!0 1 million Remittance of pri3e money# sponsors'ip of sports activity abroad by person ot'er t'an 2nternational# 4ational#!tate level sports bodies, if t'e amount involved e+ceeds "! 0566666 ayment for securin& 2nsurance for 'ealt' from a company abroad Remittance for members'ip of 8 2 Club
Ministry of Human Resource Development (Department of 7out' Affairs and !ports) Ministry of Finance, (2nsurance Division) Ministry of Finance, (2nsurance Division)
4rior appro)a! of the Reser)e ank. 38
There are certain transactions listed in below which cannot be undertaken without the prior approval of the #eserve 5ank, these provisions shall not apply where the payment is made out of funds held in #esident Foreign /urrency 2#F/4 :ccount or xchange arners Foreign /urrency 2F/4 :ccount of the remitter. The transactions for which prior approval of the #eserve 5ank is needed are as follows? #emittance by artiste e.g. wrestler, dancer, entertainer etc. 2This restriction is not applicable to artistes engaged by tourism related organiations in )ndia like )TD/, %tate Tourism Development /orporations etc. during special festivals or those artistes engaged by hotels in five star categories, provided the expenditure is met out of F/ account4 0 #elease of exchange exceeding 1%' +,@@@ or its euivalent in one calendar year, for one or more private visits to any country 2except epal and 5hutan4 7ift, remittance exceeding 1%' +,@@@ per beneficiary per annum0 Donation exceeding 1%' +,@@@ per annum per beneficiary 0 xchange Facilities exceeding 1%' +@@@ for persons going abroad for employment0 xchange Facilities for emigration exceeding 1%' +,@@@ or amount prescribed by country of emigration0 #emittance for maintenance of close relatives abroad exceeding 1%' +,@@@ per year per recipient0 #elease of foreign exchange, exceeding 1%' *+,@@@ to a person, irrespective of period of stay, for business travel, or attending a /onference or specialied training or for maintenance expenses of a patient going abroad for medical treatment or checkup abroad, or for accompanying as attended to a patient going abroad for medical treatment3/heckup0 #elease of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in )ndia or hospital3doctor abroad0 #elease of exchange for studies abroad exceeding the estimates from the institution abroad or 1%' ;@,@@@, whichever is higher0 /ommission to agents abroad for sale of resident flats3commercial plots in )ndia, exceeding +Hof the inward remittance0 %hort term credit to overseas offices of )ndian companies0 #emittance for advertisement on foreign television by a person whose export earnings are less than #s. >@ lakhs during each of the preceding two years0 #emittances of royalty and payment of lumpsum fee under the technical. collaboration agreement which has not been registered with #eserve 5ank0 #emittance exceeding 1%' >@@,@@@ for architectural3consultancy services procured from abroad0 #emittances for use and3or purchase of trade mark3franchises in )ndia. xchange facilities for transactions.
•
• • • •
•
•
•
•
•
• •
•
•
•
Exchange faci!ities for transactions xchange facilitate for transaction in schedule )) to the rules may be permitted by authorised dealers provided the applicant has secured the approval from the Ginistry Department of 39
7overnment of )ndia indicated against the transactions. )n respect of transactions included in %chedule ))) where the remittance applied for exceeds the limit, if any, indicated in the schedule or other transactions included in %chedule ))) for which no limit have been stipulated would reuire prior approval of #eserve 5ank. Remittances for other current 6ccount transactions #emittances for all other current transactions which are not specifically prohibited under the rules or which are not included in %chedule )) or ))) may be permitted by authorised dealers without any monetary3percentage ceilings sub&ect to compliance with the provisions of %ubsection 2+4 of %ection >@ of FG:. #emittances for transactions included in %chedule )))9 may be permitted by authorised dealers up to the ceilings prescribed therein. For removal of doubts, it is clarified that The existing procedure to be followed by )ndian companies for entering into collaboration arrangements with overseas collaborators would continue. There would be 9no restriction regarding receipt of advance payment or back to back letter of credit for merchanting trade transactions. )n terms of Foreign xchange Ganagement 25orrowing or Eending in Foreign xchange4 #egulations, *@@@ approval of #eserve 5ank would be reuired for importers availing of %upplier9s /redit beyond >=@ days and 5uyer9s /redit irrespective of the period of credit. Transactions relating to import of ship stores into bond for supply to )ndian3foreign flag vessels, )ndian aval ships, and foreign diplomatic personnel will no more be regulated by #eserve 5ank. #emittance of surplus freight3passage collections by shipping3airline companies or their agents, remittances by break bulk agents, multimodal transport operators, remittance of freight prepaid on inward consolidation of cargo, operating expenses of )ndian airline3shipping companies etc. may be permitted by authorised dealers after verification of documentary evidence in support of the remittance.
The #eserve 5ank will not prescribe the documentation which should be verified by the authorised dealers while permitting remittances for various transactions, particularly of current account. )n this connection attention of authorised dealers is drawn to %ubsection 2+4 of %ection >@ of FG: which provides that an authorised person shall before undertaking any transaction in foreign exchange on behalf of any person reuire that person to make such a declaration and to give such information as will reasonably satisfy him that the transaction will not involve and is not designed for the purpose of any contravention or evasion of the provisions of FG: or of any rule, regulation, notification, direction or order issued there under. :uthorised dealers are advised to keep on record any information3documentation on the basis of which the transaction was undertaken for verification by the #eserve 5ank. The said clause further provides that where the said person 2applicant4 refuses to comply with any such reuirement or makes unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall if he has reason to believe that any contravention3 evasion is contemplated by the person, report the matter to #eserve 5ank
"apita! 6ccount $ransactions
40
: capital account transaction as defined in %ection *2e4 of FG: means a transaction which alters the assets or liabilities, including contingent liabilities, outside )ndia of persons resident in )ndia or assets or liabilities in )ndia of persons resident outside )ndia, and includes transactions referred to in %ubsection 2;4 of %ection A. The new legislation vide %ection A deals with capital accounts transactions. %ubsection 2>4 of the %ection A gives a general liberty providing that any person may sell or draw foreign exchange to or from an authoried person for a capital account transaction. The application of this clause is however sub&ect to the provisions of %ubsection 2*4 of the %ection A which states that the #eserve 5ank may in consultation with the /entral 7overnment specify any class or classes of capital account transactions which are permissible and the limit up to which foreign exchange shall be admissible for such transactions. :ccording to the regulations made under %ection A 2*4 of FG:, investment in )ndia by a person resident outside )ndia in any company or partnership firm or proprietary concern which is engaged in the business of /hit Fund or as a idhi /ompany or in :gricultural or 8lantation activities or in #eal state business 2other than development of townships, construction of residential commercial premises, roads or bridges4 or construction of farm houses or trading in Transferable Development #ights 2TD#s4 is prohibited. %chedule ) to the regulations specifies the permissible classes of /apital account transactions of a person resident in )ndia and %chedule )) specifies the permissible classes of such transactions by a person resident outside )ndia. "!assification of capita! account transactions/
The capital account transactions have been classified into two categories? /apital :ccount Transactions of the following types made by persons resident in )ndia? • • • • • •
)nvestment by a person resident in )ndia in foreign securities. Foreign currency loans raised in )ndia and abroad by a person resident in )ndia. Transfer of immovable property outside )ndia by a person resident in )ndia. 7uarantees issued by a person resident in )ndia in favor of a person resident outside )ndia. xport, import and holding of currency3currency notes. Eoans and overdrafts 2borrowings4 by a person resident in )ndia from a person resident outside )ndia. 41
•
Gaintenance of foreign currency accounts in )ndia and outside )ndia by a person resident in
•
)ndia. Taking out of insurance policy by a person resident in )ndia from an insurance company
• • •
outside )ndia. Eoans and overdrafts by a person resident in )ndia to a person resident outside )ndia. #emittance outside )ndia of capital assets of a person resident in )ndia. %ale and purchase of foreign exchange derivatives in )ndia and abroad and commodity derivatives abroad by a person resident in )ndia.
/apital account transactions of the following types made by persons resident outside )ndia? •
)nvestment in )ndia by a person resident outside )ndia, that is to say, )ssue of security by a body corporate or an entity in )ndia and investment therein by
a person resident outside )ndia0 and )nvestment by way of contribution by a person resident outside )ndia to the capital
•
of a firm or a proprietorship concern or an association of persons in )ndia. :cuisition and transfer of immovable property in )ndia by a person resident outside )ndia. 7uarantee by a person resident outside )ndia in favour of, or on behalf of, a person resident
•
in )ndia. )mport and export of currency3currency notes into3from )ndia by a person resident outside
•
• • •
)ndia. Deposits between a person resident in )ndia and a person resident outside )ndia. . Foreign currency accounts in )ndia of a person resident outside )ndia. #emittance outside )ndia of capital assets in )ndia of a person resident outside )ndia.
/apital account transactions on which restrictions cannot be imposed. There are two types of drawing foreign exchange, they are?
for amortiation of loan0 and for depreciation of direct investments in ordinary course of business.
#estrictions cannot be imposed when drawal is for the purpose of repayments of loan installments.
Ear!ier permission re!ating to capita! account transaction ?
1nder the provisions of F#: no person could make any capital account transactions except with the previous general or special permission of the #eserve 5ank. 8rohibitions on capital account transactions in the new legislation. 42
: person resident outside )ndia is prohibited from making investment in )ndia in any form in any company or partnership firm or proprietary concern or any entity, whether in corporate or not, which is engaged or proposes to engage in ?
•
in the business of chit fund0 a idhi /ompany0 agricultural or plantation activities0 real estate business 2the term shall not include development of townships, construction of
•
residential or commercial premises, roads or bridges4 or construction of farm houses0 or trading in Transferable Development #ights 2TD#s4.The term Transferable Development
• • •
#ights has been explained under the head 9Geaning of terms9.
d& "ase Study on FEM6 R2 s!apped Rs.1+= crore on Re!iance 2nfrastructure/
The #eserve 5ank of )ndia 2#5)4 has asked the :nil Dhirubhai :mbani 7roup firm, #eliance )nfrastructure 2earlier, #eliance nergy4, to pay &ust under #s >*+ crore as compounding fees for parking its foreign loan proceeds worth ';@@ million with its mutual fund in )ndia for ;>+ days, and then repatriating the money abroad to a &oint venture company. These actions, according to an #5) order, violated various provisions of the Foreign xchange Ganagement :ct 2FG:4. )n its order, #5) said #eliance nergy raised a ';A@million /5 on 6uly *+, *@@A, for investment in infrastructure pro&ects in )ndia. The /5 proceeds were drawn down on ovember >+, *@@A, and temporarily parked overseas in liuid assets. "n :pril *A, *@@B, #eliance nergy repatriated the /5 proceeds worth ';@@ million to )ndia while the balance remained abroad in liuid assets. )t then invested these funds in #eliance Gutual Fund 7rowth "ption and #eliance Floating #ate Fund 7rowth "ption on :pril *A, *@@B. "n the following day, i.e., on :pril *B *@@B, the entire money was withdrawn and invested in #eliance Fixed Corion Fund ))) :nnual 8lan series L. "n Garch +, *@@=, #eliance nergy repatriated '+@@ million 2which included the /5 proceeds repatriated on :pril *A, *@@B, and invested in capital market instruments4 for investment in capital of an overseas &oint venture called 7ourock Lentures based in 5ritish Lirgin )slands. #5) said, under FG: guidelines issued in *@@@, a borrower is reuired to keep /5 funds parked abroad till the actual reuirement in )ndia. Further, the central bank said a borrower cannot utilise the funds for any other purpose. KThe conduct of the applicant was in contravention of the /5 guidelines and the same are sought to be compounded,J the #5) order signed by its chief general manager %alim 7angadharan said. During the personal hearing on 6une >A, *@@=, #eliance nergy, represented by group managing 43
director 7autam Doshi and 8rice waterhouse /oopers executive director %an&ay Iapadia, admitted the contravention and sough compounding. The company said due to unforeseen circumstances, its Dadri power pro&ect was delayed. Therefore, the /5 proceeds of ';@@ million were bought to )ndia and was parked in liuid debt mutual fund schemes, it added. #e&ecting #eliance nergy’s contention, #5) said it took the company ;>+ days to realise that the /5 proceeds are not reuired for its intended purpose and to repatriate the same for alternate use of investment in an overseas &oint venture on Garch +, *@@=. #eliance also contended that they invested the /5 proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in )ndia. K) do not find any merit in this contention also as the applicant has not approached #5) either for utilising the proceeds not provided for in the /5 guidelines, or its repatriation abroad for investment in the capital of the 6L,J the #5) official said in the order. )n its defence, the company said the exchange rate gain on account of remittance on Garch + *@@=, would be a notional interim rate gain as such exchange rate gain is not crystallised. 5ut #5) does not think so. KThey have also stated that in terms of accounting standard >> 2:% >>4, all foreign exchange loans have to be restated and the difference between current exchange rate and the rate at which the same were remitted to )ndia, has to be shown as foreign exchange loss3gain in profit and loss accounts. Cowever, in a scenario where the proceeds of the /5 are parked overseas, the exchange rate gains or losses are neutralied as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset. )n this case, the exchange gain had indeed been realised and that too the additional exchange gain had accrued to the company through an unlawful act under FG:,J the order said. )t said as the company has made additional income of #s >*( crore, it is liable to pay a fine of #s >*(.A= crore. "n :ugust this year, the company submitted another fresh application for compounding and reuested for withdrawal of the present application dated :pril >B, *@@=, to include contravention committed in respect of an another transaction of /5 worth '>+@ million. 5ut #5) said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.
44
e&
"ontra)entions and 4ena!ties under FEM6
)f any person contravenes any provision of this :ct, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers un der this :ct, or contravenes any condition sub&ect to which an authoriation is issued by the #eserve 5ank, he shall, upon ad&udication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is uantifiable, or up to two lakh rupees where the amount is not uantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. :ny :d&udicating :uthority ad&udging any contravention may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the /entral 7overnment and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought ba ck into )ndia or shall be retained outside )ndia in accordance with the directions made in this behalf.
G4ropertyG in respect of which contravention has taken place, shall include deposits in a bank,
where the said property is converted into such deposits, )ndian currency, where the said property is converted into that currency0 and any other property which has resulted out of the conversion of that property. )f any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment. 45
A. FER6 FEM6 a& Simi!arities 9ifferences et3een FER6 FEM6 Simi!arities/
The similarities between F#: and FG: are as follows? •
The #eserve 5ank of )ndia and central government would continue to be the regulatory bodies.
•
8resumption of extra territorial &urisdiction as envisaged in section 2>4 of F#: has been retained.
•
The Directorate of nforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seiure
Sr. #o
>
92FFERE#"ES
FER6
8#"L)%)"%
F#: consisted of => sections, and wasFG: is much simple, and consist of more complex
F:T1#% *
FEM6
only (< sections.
8resumption of negative intention 2Gens These presumptions of Gens #ea and #ea 4 and &oining hands in offenceabatement have been excluded in 2abatement4 existed in FG:
FG:
46
W T#G% )Terms like /apital :ccount Transaction, Terms FG:
current
;
:ccount
Transaction,
like
person, Transaction,
service etc. were not defined in F#:.
/apital
:ccount
current
account
Transaction person, service etc., have been defined in detail in FG:.
DF))T)" (
"FDefinition of !:uthoried 8erson! in The definition of :uthoried person
:1TC"#)QD
F#: was a narrow one 2 *2b4
8#%"
has been widened to include banks, money changes, off shore banking 1nits etc. 2* 2 c 4
G:)7
"FThere was a big difference in the The provision of FG:, are in
!#%)DT!
:%definition of !#esident!, under F#:, and consistent with income Tax :ct, in
/"G8:#D W)TC
)ncome
Tax
)/"G
:ctrespect to the definition of term ! #esident!. ow the criteria of !)n
T:$ :/T.
)ndia for >=* days! to make a person resident has been brought FG:.
Therefore a
person
under who
ualifies to be a nonresident under the income Tax :ct, > will also be considered a nonresident for the +
purposes of application of FG:, but a person who is considered to be non resident
under
FG:
may
not
necessarily be a nonresident under the )ncome business
Tax :ct, man
for instance a
going
abroad
and
staying therefore a period of >=* days or more in a financial year will become a nonresident under FG:.
81)%CGT
:ny offence under F#:, was a criminalCere, the offence is considered to be a offence , punishable with imprisonment as civil offence only punishable with per code of criminal procedure, >
some amount of money as a penalty. 47
)mprisonment is prescribed only when
A
one fails to pay the penalty. P1:T1G
"FThe monetary penalty payable under 1nder FG: the uantum of penalty
8:ET-.
F#:, was nearly the five times the has been considerably decreased to
B
amount involved.
:88:E
:n
appeal
three times the amount involved.
against
the
order
of The appellate authority under FG:
!:d&udicating office!, before ! Foreign is the special Director 2 :ppeals4 xchange #egulation :ppellate 5oard :ppeal went before Cigh /ourt
against
the
order
of
:d&udicating :uthorities and special
=
Director !:ppellate
2appeals4 Tribunal
lies
before
for
Foreign
xchange.! :n appeal from an order of :ppellate Tribunal would lie to the Cigh /ourt. 2sec >B,>=,;+4 #)7CT <
"FF#: did
:%%)%T:/ D1#)7
>@
%:#/C %)Q
contain
any
expressFG: expressly recognies the right
provision on the right of on impleaded of appellant to take assistance of legal
E7:E person to take legal assistance
8#"/D)7%. 8"W#
not
practitioner or chartered accountant 2;*4
"FF#: conferred wide powers on a police The scope and power of search and :Dofficer not below the rank of a Deputyseiure has been curtailed to a great %uperintendent of 8olice to make a search extent
c& ey $erms0!ossary 3ith respect to FER6 FEM6 1. 6uthorised 4erson - !:uthorised person! means an authorised dealer, moneychanger, offshore
banking unit or any other person for the time being authorised under section >@2>4 to deal in foreign exchange securities. +. "apita! 6ccount $ransaction - !/apital account transaction! means a transaction which alters
the assets or liabilities, including contingent liabilities, outside )ndia of persons resident in )ndia or
48
assets or liabilities in )ndia of person resident outside )ndia, and includes transactions referred to in subsection 2;4 of section A 8. "urrent 6ccount $ransaction - !/urrent account transaction! means a transaction other than a
capital account transaction and without pre&udice to the generality of the foregoing such transaction includes,
8ayments due in connection with foreign trade, other current business, services, and shortterm banking and credit facilities in the ordinary course of b usiness.
8ayments due as interest on loans and as net income from investments.
#emittances for living expenses of parents, spouse and children residing abroad, and
xpenses in connection with foreign travel, education and medical care of parents, spouse and children0
+.
Foreign exchange reser)es : country9s reserves of foreign currencies. /ommonly known
as !uick cash!, they can be used immediately to finance imports and other foreign payables.
8.
Foreign portfo!io in)estment )nvestment into financial instruments such as stocks and
bonds in which the ob&ective is not to engage in business but to merely generate dividend income and capital gains. The larger portion of international investment flows in the world today is F8)s.
:.
For3ard contract :n arrangement between two parties to trade specified amounts of two
/urrencies at some designated future due date at an agreed price. Gore than a formal hedge against unforeseen changes in currency prices, it guarantees certainty in the foreign exchange rate at the contract9s delivery date.
=.
For3ard s3ap The most common type of forward transaction, forward swaps comprise
A@ per cent of all foreign exchange transactions. )n a swap transaction, two companies immediately exchange currency for an agreedupon length of time at an agreed exchange rate. 49
:t the end of the time period, each company returns the currency to the former owner at the original exchange rate with an ad&ustment for interest rate differences.
>. 6uthorised dea!er
!authorised dealer! means a person for the time being authorised under
section A to deal in foreign exchange0
@.
Franchising Franchising is similar to licensing, although it tends to involve much longer
term commitments than licensing. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed primarily by service firms. : franchising agreement invol cRes a franchise or selling limited rights for the use of its brand name to a franchisee in return for a lump sum payment and a share of the franchise9s profits.
A. Free f!oat
: process in international monetary markets in which foreign currency prices
change relative to one another, free of central bank intervention and sub&ect only to the global supply of and demand for specific currencies. ot many countries have their currencies on a free float. The currencies of most industrial countries are on a !managed float!.
,.
9ra3a! !Drawal9 means drawal of foreign exchange from an authoried person and
includes opening of Eetter of /redit or use of )nternational Debit /ard or : TG card or any other thing by whatever name called which has the effect of creating foreign exchange liability.
1'.
6uthoriHed person #eaders to note that the term 9authoried person9 has been defined in
clause (c) of %ection * of FG:. )t provides that an 9authoried person9 means an authoried dealer, money changer, off shore banking unit or any other person for the time being authoried under the provisions of %ubsection 2>4 of %ection >@ to deal in foreign exchange or foreign securities.
50
11.
$ransfera!e 9e)e!opment Rights
9Transferable Development #ights9 means
certificates issued in respect of category of land acuired for public purpose either by /entral or %tate 7overnment in consideration of surrender of land by the owner without monetary compensation, which is transferable in part or whole.
1+.
"urrency Iinc!uding re!e)ant notificationJ
!/urrency! includes all currency notes, postal notes, postal orders, money orders, cheues, drafts, travellers cheues, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the #eserve 5ank0
,. "apita! account con)ertii!ity :ccording to the Tarapore /ommittee provided a succinct and subtle definition? /apital :ccount /onvertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. )t is associated with changes of ownership in foreign3domestic financial assets and liabilities and embodies the creation and liuidation of claims on, or by, the rest of the world. 2MFKs ROBE 2# ".6." •
/onvertibility is an )GF clause that all the member countries must adhere to in order to work towards the common goals of the organiation. Cowever /"L#T)5)E)T- per se can be looked into from various perspectives and incorporated accordingly by the member nations. :n economy can choose to be 2a4 partially convertible on /1##T ://"1T 2b4 partially convertible on /:8)T:E ://"1T 2c4 fully convertible on current account and 2d4 fully convertible on capital account.
)t is important to state here that KThe )GF’s mandate is conspicuous on current account convertibility as current account liberaliation is among the )GF’s official purposes outlined in its :rticles of :greement, but it has no explicit mandate to promote capital account liberaliation. )ndeed, the :rticles give the )GF only limited &urisdiction over the capital account however the )GF has given greater attention to capital account issues in recent decades, given the increasing importance of international capital flows for macroeconomic stability and exchange rate management in many countries. Thus there is no official binding over any member state to opt for F1EE /:8)T:E ://"1T /"L#T)5)ET- but it has been a constant component of the )GF’s advisory reports on member countries. 2#926 6#9 "6" 51
Though the rupee had become fully convertible on current account as early as ><<>, the #5) has been adopting a cautious approach towards full float of the rupee, particularly after the ><@ years, the current account convertibility since ><<( means that both resident )ndians and corporate have easy access to foreign exchange for a variety of reasons like education, health and travel. They are allowed to receive and make payments in foreign currencies on trade account. The next logical step in the same direction would be full convertibility, which would remove restrictions on capital account. •
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)ndia to be achieved over a time frame of ; years. )n ><
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Fiscal /onsolidation i. #eduction in gross fiscal deficit 27FD4 to 7D8 ratio to ;.+H. ii. : consolidated sinking fund 2/%F4 to be set up to meet government9s debt repayment needs to be financed by increase in #5)9s profit transfer to the government and disinvestment proceeds.
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Gandated )nflation #ate iii. The mandated inflation rate should remain at an average ;+H for the threeyear period.
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/onsolidation in the Financial %ector iv. 7ross nonperforming assets 28:s4 of the banking sector 2as a percentage of total advances4 to be brought down to +H. v. : reduction in the average effective /ash #eserve #atio 2/##4 for the banking systemto ;H.
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xchange #ate 8olicy vi. #5) should have a Gonitoring xchange #ate 5and of plus minus +H around a neutral 52
#eal ffective xchange #ate 2##4. #5) should be transparent about the changes in ##. •
5alance of 8ayments )ndicators vii. #eduction in Debt %ervicing #atio to *@H.
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:deuacy of Foreign xchange #eserves viii. #eserves should not be less than six months of imports. ix. The short term debt and portfolio stock should be lowered to A@H of level of reserves. x. The net foreign exchange assets to currency ratio 2F:3/urrency4 should be prescribed by law at not less than (@H.
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)t allows domestic residents to invest abroad and have a globally diversified investment portfolio, this reduces risk and stabilies the economy. : globally diversified euity portfolio has roughly half the risk of an )ndian euity portfolio. %o, even when conditions are bad in )ndia, globally diversified households will be buoyed by offshore assets0 will be able to spend more, thus propping up the )ndian economy. "ur #) Diaspora will benefit tremendously if and when /:/ becomes a reality. The reason is on account of current restrictions imposed on movement of their funds. :s the remittances made by #)’s are sub&ect to numerous restrictions which will be eased considerably once /:/ is incorporated. )t also opens the gate for international savings to be invested in )ndia. )t is good for )ndia if foreigners invest in )ndian assets S this makes more capital available for )ndia’s development. That is, it reduces the cost of capital. When steel imports are made easier, steel becomes cheaper in )ndia. %imilarly, when inflows of capital into )ndia are made easier, capital becomes cheaper in )ndia. /ontrols on the capital account are rather easy to evade through unscrupulous means. Cuge amounts of capital are moving across the border anyway. )t is better for )ndia if these transactions happen in white money. /onvertibility would reduce the sie of the black economy, and improve law and order, tax compliance and corporate governance.
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Gost importantly convertibility induces competition against )ndian finance. /urrently, finance is a monopoly in mobiliing the savings of )ndian households for the investment plans of )ndian firms. o matter how inefficient )ndian finance is, households and firms do not have an alternative, thanks to capital controls. xactly as we saw with trade liberaliation, which conseuently led to lower prices and superior uality of goods produced in )ndia, capital account liberaliation will improve the uality and drop the price of financial intermediation in )ndia. This will have repercussions for 7D8 growth, since finance is the Nbrain’ of the economy.
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During the good years of the economy, it might experience huge inflows of foreign capital, but during the bad times there will be an enormous outflow of capital under Kherd behaviorJ 2refers to a phenomenon where investors acts as KherdsJ, i.e. if one moves out, others follow immediately4. For example, the %outh ast :sian countries received 1%' <( billion in ><<@* billion flowed out from the region in the second half of ><
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)nternational finance capital today is Khighly volatileJ, i.e. it shifts from country to country in search of higher speculative returns. )n this process, it has led to economic crisis in numerous developing countries. %uch finance capital is referred to as Khot moneyJ in today’s context. Full capital account convertibility exposes an economy to extreme volatility on account of Khot moneyJ flows. )t does seem that the )ndian economy has the competence of bearing the strains of free capital mobility given its fantastic growth rate and investor confidence. Gost of the pre conditions stated by the T:#:8"# committee have been well complied to through robust year on year performance in the last five years especially. The forex reserves provide enough buffer to bear the immediate flight of capital which although seems unlikely given the macroeconomic variables of the economy alongside the confidence that international investors have leveraged on )ndia. Cowever it must not be forgotten that /.:./ is a big step and integrates the economy with the global economy completely thereby sub&ecting it to international fluctuations and business cycles. Thus due caution must be incorporated while taking this decision in order to avoid any situation that was faced by :rgentina in the early =@’s or by the :sian economies in ><
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1'. "O#"BLS2O# :s a part of the on going process of economic liberaliation relating to foreign investments and foreign trade in )ndia and as a measure for closer interaction with the world economy the Foreign xchange #egulation :ct, ><<; and several amendments were made therein. Further review of the F#: was undertaken by the /entral 7overnment of )ndia in the light of subseuent developments and on account of the experience in relation to foreign trade and investment in )ndia, the /entral 7overnment felt that instead of further amending the F#:, the better course would be to repeal the existing :ct and to enact a new legislation in its place. )n view of the same, the #5) was asked to suggest a new legislation based on the report submitted by a task force constituted for this purpose by the #5) recommending substantial changes in F#:. There has been a substantial increase in the Foreign xchange #eserves of )ndia. specially after repulsion of F#: in *@@@ there has been a tremendous surge in Foreign xchange #eserves.
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%ince the year ><<;, Foreign trade has grown up. Development has taken place such as current account convertibility, liberaliation in investments abroad, increased access to external commercial borrowings by )ndian /ompanies and participation by foreign institutional investors in securities markets in )ndia. Ieeping in view these changes the /entral 7overnment of )ndia has introduced the FG: to repeal F#:. : marked digression from the general rule that the :ccused is presumed to be innocent until proved guilty beyond reasonable doubt, is found in the FG:. : presumption regarding documents, contained in this 5ill is contrary to the general rules of evidence. For example, when documents pertaining to a crime under FG: are discovered the /ourt will presume that the contents of the documents are true and correct and will not go into the uestion whether the incriminating documents may have been forged. Thus, it becomes the responsibility of the :ccused to prove, in case that the documents are fabricated. The main change between F#: and FG: is in the approach. F#: seeks to regulate almost all the transactions involving foreign exchange and inbound3outbound investments. )n F#: every provision is restrictive and starts with a negative proposition stating that whatever is mentioned in that section is prohibited unless the prior permission either general or special, as may be reuired in the specific case, of #5) is obtained. F#: provides that nothing can be done without #5)9s permission. )n comparison to this existing negative piece of legislation, the provision of FG: has a positive approach. This can be found from the provisions of FG: dealing with capital account transactions which are to be regulated. 1nlike F#: which provides that these transactions cannot be entered into without prior permission of #5), FG: provides that any person may sell or draw foreign exchange for such transactions and then specifies the powers of the #5) to regulate the class or limits of such capital account transactions. Thus the basic proposition in the proposed FG: 5ill is positive. FG: classifies foreign exchange transactions into capital account transactions and current account transactions and amongst the two regulates the former more closely. 1nder FG: residential status will not depend upon the intent of the person to reside in )ndia but would depend upon the exact period of his stay in )ndia. The provisions of the FG: 5ill aims at consolidating and amending the law relating to foreign exchange with the ob&ect of facilitating external trade and payments and for promoting the orderly payment and amendments in foreign exchange markets in )ndia. The FG: 5ill empowers the #5) to authorie persons to deal in foreign securities specifying the conditions for the same. )t also provides for a person resident in )ndia in holding, owning, transferring or investing in foreign security and for a person resident out side )ndia in holding, owning, transferring or investing in )ndian %ecurities.
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